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New month, more liquidity…same risks

By Hamish Muress

Welcome back from summer (except our US friends who enjoy Labour Day!). The pound has started the new month on the back foot following back and forth comments from Michel Barnier and Theresa May regarding Brexit. It would appear that Barnier has wound back some of his comments last week regarding an unprecedented Brexit deal having received no reciprocal comments from Theresa May. Indeed May said that she would not budge on her Brexit position and “be pushed into accepting compromises to the Chequers proposals”.

The new month and new week also marks the return of concrete UK data with the latest PMIs as well as Mark Carney and his colleagues testifying in front of Parliament’s Treasury Select Committee.

The USD starts every month the same with the release of Non-Farm Payroll figures (the headline job growth data). However this is unlikely to dissuade the USD this week with the market expecting the Federal Reserve to hike its interest rates at the end of the month. There is currently over a 95% chance of another hike according to the Fed funds futures so data coming out of the US may be on the back foot. Of greater importance perhaps will be the ongoing trade disputes with China. This week the US should impose 25% tariffs on another $200 billion Chinese imports and it doesn’t look like they are closer to an agreement. If anything the tit for tat continues as China announced its own tariffs on $60 billion of US imports.

It’s a big week for the euro as well with a raft of key data set to be released. Of note will be the release of PMIs across the Eurozone as well as retail sales. With regards to Italy there has been a small reprieve as the level headed Finance Minister Giovanni Tria stated that the budget would not breach the 3% ceiling of GDP that the EU imposes. This follows the decision from credit ratings agency Fitch to place it on a negative rating.

The Aussie dollar is still suffering the effects of the decision from Westpac last week to raise the interest rates on its variable mortgages. The Reserve Bank of Australia is one of three central banks meeting this week to discuss their own central rates (the BoC and Riksbank also meet) however the RBA is perhaps the least likely to hike rates.

Having stressed all of last week about the importance of Friday’s deadline regarding the new NAFTA deal Canada and the US (and Mexico) were unable to put pen to paper. Negotiations will resume this week and will be closely watched by the market due to the fact that the NAFTA (re)agreement almost acts as a litmus test to Trump’s outlook and willingness to compromise.

As mentioned as well the Bank of Canada are set to meet and discuss their interest rates this week and whilst there had been a small risk of a hike this has subsided somewhat due to GDP figures missing the beat last week.

Dairy prices on Tuesday will be released once again and having missed expectations significantly over the last few months the risk to the New Zealand dollar remains. Greater than this as well investors are now thinking the next action from the Reserve Bank of New Zealand could be a cut.